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1.

Question :

(TCO 9) Trent files his tax return 35 days after the due date. Along with the return, Trent remits a check for
$8,000, which is the balance of the tax owed.
Disregarding the interest element, Trent's total failure to file and to pay penalties are:

Student
Answer:

$80.
$720.
$800.
$880.
None of the above

Instructor
Following the procedure set forth in Example 15, the penalty is determined as follows:
Explanation:

Failure to pay penalty [1/2% x $8,000 x 2 (2 months violation)]: $80


Plus: Failure to file penalty [5% x $8,000 x 2 (2 months violation)]: $800
Less: Failure to pay penalty (80): $720
Total penalties: $800
pp.1-24 to 1-25
2.

Question : (TCO 9) A landlord leases property upon which the tenant makes improvements. The improvements are

significant and are NOT made in lieu of rent. At the end of the lease, the value of the improvements are
NOT income to the landlord. This rule is an example of:
Student Answer:

the wherewithal to pay concept.


the tax benefit rule.
the arm's length concept.
a clear reflection of income result.
None of the above

Instructor Explanation:
3.

Question :

p.1-30 to 1-31

(TCO 1) The Internal Revenue Code was codified for the first time in what year?

Student Answer:

1913
1923
1939
1954

1986
Instructor Explanation:
4.

p. 2-1

Question : (TCO 1) In 212(1), the number (1) stands for the:

Student Answer:

section number.
subsection number.
paragraph designation.
subparagraph designation.
None of the above

Instructor Explanation:
5.

p.2-4 to 2-5

Question : (TCO 11) Which of the following taxpayers may file as a head of household in 2012?

Student
Answer:

Ron provides all of the support for his mother, Betty, who lives by herself in an apartment in Fort
Lauderdale. Ron pays the rent and other expenses for the apartment and properly claims his
mother as a dependent.
Tammy provides over one-half of the support for her 18-year-old brother, Dan. Dan earned
$4,200 in 2012 working at a fast-food restaurant and is saving his money to attend college in
2013. Dan lives in Tammy's home.
Joe's wife left him late in December of 2011. No legal action was taken and Joe has not heard
from her in 2012. Joe supported his 6-year-old son, who lived with him throughout 2012.
Ron only
Tammy only
Joe only
Ron and Joe only
Ron, Tammy, and Joe

Instructor
Explanation:

6.

Question :

Student
Answer:

Ron may file as a head of household. His mother is not required to live in his household in order for
him to qualify as a head of household. Tammy can claim Dan as a dependent because Dan is a
qualifying child and is not subject to the gross income requirement. Joe can file as a head of
household under the abandoned spouse rules. p.3-27 to 3-28
(TCO 11) Arnold is married to Sybil, who abandoned him in 2009. He has NOT seen or communicated
with her since April of that year. He maintains a household in which their son, Evans, lives. Evans is age
25 and earns over $20,000 each year. For tax year 2012, Arnold's filing status is:
married filing jointly.

married filing separately.


head of household.
surviving spouse.
single.
Instructor
Explanation:

7.

Question :

Arnold cannot file jointly without Sybil's consent (choice A). He is not an abandoned spouse since
Evans is not a dependent child. Evans cannot be claimed as a qualifying child (age test) and is not a
qualifying relative (gross income test). Because Arnold is still treated as being married, his only
option is married filing separately (choice B). p.3-28 to 3-29
(TCO 7) Kathy operates a gym. She sells memberships that entitle the member to use the facilities at
any time. A 1-year membership costs $360 ($360/12 = $30 per month); a 2-year membership costs
$600 ($600/24 = $25 per month). Cash payment is required at the beginning of the membership period.
On July 1, 2012, Kathy sold a 1-year membership and a 2-year membership.
I. If Kathy is a cash basis taxpayer, her 2012 gross income from the contracts is $960 ($360 + $600).
II. If Kathy is an accrual basis taxpayer, her 2012 gross income from the contracts is $330 [(6/12 x
$360) + (6/24 x $600)].
III. If Kathy is an accrual basis taxpayer, her 2013 gross income from the contracts is $630 [(6/12)
($360) + $450].

Student
Answer:

Only I is true.
Only I and II are true.
Only II and III are true.
I, II, and III are true.
None of the above

Instructor
Explanation:

8.

A cash basis taxpayer recognizes the income when it is actually or constructively received. The
accrual basis taxpayer who receives prepaid income for services can prorate the income in the year
of receipt but must include the balance of the income in the second year. This limited deferral is
provided under Revenue Procedure 2004-34. p.4-8 to 4-9.

Question : (TCO 7) The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients

generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40
hours of services. Once the client has received 40 hours of services, Green charges $400 per hour.
Green Company allocates the retainer to income based on the number of hours worked on the contract.
At the end of the tax year, the company had $40,000 of unearned revenues from these contracts. The
company also had $10,000 in unearned rent income received from excess office space leased to other
companies. Based on the above, Green must include in gross income for the current year:
Student
Answer:

$0.
$10,000.

$40,000.
$50,000.
None of the above
Instructor
Explanation:

9.

The prepaid income from services that will be earned in the following year by Green can be deferred
under Revenue Procedure 2004-34. However, the prepaid income from rents is not eligible for
deferral. p.4-13 to 4-15

Question : (TCO 3) Section 119 excludes the value of meals from the employees' gross income:

Student Answer:

whenever the employer pays for the meals.


when the employer pays for the meals, if the employee makes an accounting to
the employer.
when the meals are provided for the employee on the employer's business
premises as a convenience to the employee.
when the meals are provided for the employee on the employer's business
premises as a convenience to the employer.
None of the above

Instructor Explanation:
10.

Question :

p.5-16 to 5-19

(TCO 3) Under the Swan Company's cafeteria plan, all full-time employees are allowed to select any
combination of the benefits below, but the total received by the employee CANNOT exceed $8,000 a
year.
I. Group medical and hospitalization insurance for the employee, $3,600 a year.
II. Group medical and hospitalization insurance for the employee's spouse and children, $1,200 a year.
III. Childcare payments, actual cost, but not more than $4,800 a year.
IV. Cash required to bring the total of benefits and cash to $8,000.
Which of the following statements is true?

Student Answer:

Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross
income must include the $2,000.
Paul, a full-time employee, elects to receive $8,000 cash because his wife's
employer provided these same insurance benefits for him. Paul is required to include
the $8,000 in gross income.
Sue, a full-time employee, elects to receive choices I, II, and $3,200 for III. Sue is
not required to include any of the above in gross income.
All of the above

None of the above


Instructor Explanation: p.5-19 to 5-26
11.

Question :

(TCO 10) On June 1, 2011, Irene places in service a new automobile that cost $21,000. The car is
used 70% for business and 30% for personal use (Assume that this percentage is maintained for the
life of the car.). She does NOT elect to take additional first-year depreciation. Determine the cost
recovery deduction for 2012.

Student Answer:

$3,060
$3,290
$3,360
$6,720
None of the above

Instructor Explanation:

12.

Question :

$21,000 x 32% = $6,720 (limited to $5,100)


$5,100 x .70 = $3,570
These depreciation limits are indexed annually.
p.8-18 to 8-19

(TCO 10) Which of the following is correct?

Student Answer:

A taxpayer generally cannot claim a deduction for payment of an obligation of a


dependent.
Expenses paid for medical care of a dependent are deductible by the payor.
Charitable contributions paid on behalf of a dependent are deductible by the
payor.
Only A and B are correct.
A, B, and C are correct.

Instructor Explanation:
13.

Question :

p. 6-24 to 6-25

(TCO 10) Harry divorced Wanda during the year. He incurred the following legal expenses as itemized
on the bill from his attorney:
Fees related to property division
Fees related to the determination of dependency exemption
General legal fees incident to divorce
How much can Harry deduct?

Student Answer:

$0

$500
$150
$900

$150
$650
$1,550
None of the above
Instructor
Explanation:
14.

Question :

Only those separately stated fees that relate solely to tax advice ($150) are deductible. p.6-25

(TCO 10) Danielle owns a vacation cottage. During the current year, she rented it for $1,500 for 2
weeks, lived in it for 2 months, and left it vacant the remainder of the year. The year's expenses were
$6,000 mortgage interest expense, $500 property taxes, $1,500 in utilities, and $2,400 depreciation.
As a consequence of the above, which of the following is true?

Student Answer:

The income is excluded.


The mortgage interest and property tax expenses are itemized.
Other expenses are nondeductible personal expenses.
All of the above are true.
A and B only

Instructor Explanation:
15.

Question :

Student Answer:

p.6-20 to 6-24

(TCO 3) Norm's car, which he uses 100% for personal purposes, was completely destroyed in an
accident. The car's adjusted basis at the time of the accident was $13,000. Its fair market value was
$11,500. The car was covered by a $2,000 deductible insurance policy. Norm did NOT file a claim
against the insurance policy because of a fear that reporting the accident would result in a substantial
increase in his insurance rates. His adjusted gross income was $14,000 (before considering the loss).
What is Norm's deductible loss?
$0
$2,000
$9,500
$8,000
None of the above

Instructor
Explanation:

Amount (lesser of adjusted basis or FMV decline): $11,500


Less: Insurance recovery as if the claim had been filed: ($9,500)
Statutory floor: (100)
AGI limitation (10% x $14,000): ($1,400)

Deductible loss: $500


However, no deduction is permitted because a timely insurance claim was not filed. p.7-9 to 712
16.

Question :

(TCO 3) John had adjusted gross income of $60,000. During the year, his personal use summer
home was damaged by a fire. Pertinent data with respect to the home follows:
Cost basis
Value before the fire
Value after the fire

$250,000
$400,000
$100,000
$270,000

Insurance recovery

John had an accident with his personal use car. As a result of the accident, John was cited with
reckless driving and willful negligence. Pertinent data with respect to the car follows:
Cost basis
Value before the accident
Value after the accident
Insurance recovery

$80,000
$6,000
$20,000
$0

What is John's deductible casualty loss?


Student Answer:

$0
$15,800
$15,900
$35,900
None of the above

Instructor
Explanation:

17.

Question :

Gain on home ($270,000 $250,000): $20,000


Loss on car: ($0)
Total gain: $20,000
No casualty loss can be recognized on the car since John was cited with reckless driving and
willful negligence. p. 7-9 to 7-12
(TCO 3) Jennifer donates $1,000 to the university's athletic department. The donation guarantees
that she will have preferred seating at basketball games. Subsequently, Jennifer purchases four $50
tickets. Jennifer is allowed a charitable deduction of how much?

Student Answer:

$1,000
$200
$0
$800

Instructor Explanation:

p.10-19 to 10-24

18.

Question :

(TCO 3) Zeke made the following donations to qualified charitable organizations during the year:
Basis
$2,350

Used clothing (all acquired at least 18 months ago) of


taxpayer and his family
Stock in ABC, Inc., held as an investment for 15 months $15,000
Stock in MNO, Inc., held as an investment for 11 months $12,000
Real estate held as an investment for 2 years
$20,000

Fair Market
Value
$675
$12,875
$20,000
$35,000

The used clothing was donated to the Salvation Army; the other items of property were donated to
Eastern State University. Both are qualified charitable organizations.
Disregarding percentage limitations, Zeke's current charitable contribution deduction is:
Student
Answer:

$55,225.
$60,550.
$70,025.
$72,130.
None of the above

Instructor
Explanation:

19.

Question :

Student
Answer:

For the used clothing and the ABC stock, fair market value controls in determining the amount of the
deduction. The ABC stock was held long-term, but it was not appreciated property. The MNO stock
would not yield a long-term capital gain if sold because of the holding period. Consequently, it is
ordinary income property and the appreciation cannot be claimed. The real estate meets the definition
of long-term capital gain property. Thus $60,550 may be deducted as a charitable contribution ($675 +
$12,875 + $12,000 + $35,000 = $60,550). p.10-19 to 10-24
(TCO 3) Josh has investments in two passive activities. Activity A, acquired 3 years ago, produces
income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in
the current year. At the beginning of this year, Josh's at-risk amounts in Activities A and B are $10,000
and $100,000, respectively. What is the amount of Josh's suspended passive loss with respect to
these activities at the end of the current year?
$0
$36,000
$40,000
$100,000
None of the above

Instructor
Explanation:

20.

Question :

The $60,000 of passive income from Activity A is offset by $60,000 of the passive loss from Activity B,
leaving a net passive loss of $40,000. None of the $40,000 net passive loss is deductible in the
current year. The $40,000 net passive loss is suspended. p.11-6 to 11-8
(TCO 3) Sandra acquired a passive activity 3 years ago. Until last year, the activity was profitable and

her at-risk amount was $300,000. Last year, the activity produced a loss of $100,000, and in the
current year, the loss is $50,000. Assuming Sandra has received no passive income in the current or
prior years, her suspended passive loss from the activity is:
Student Answer:

$90,000 from last year and $50,000 from the current year.
$100,000 from last year and $50,000 from the current year.
$0 from last year and $0 from the current year.
$50,000 from the current year.
None of the above

Instructor Explanation:
21.

Question :

$100,000 from last year and $50,000 from the current year are suspended. p. 11-6 to 11-8

(TCO 3) Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year. His
current loss from the activity is $80,000. Vic had no passive activity income during the year. At the end
of the current year:

Student Answer:

Vic has an at-risk amount in the activity of $120,000 and a suspended passive
loss of $80,000.
Vic has an at-risk amount in the activity of $200,000 and a suspended passive
loss of $80,000.
Vic has an at-risk amount in the activity of $120,000 and no suspended passive
loss.
Vic has an at-risk amount in the activity of $200,000 and no suspended passive
loss.
None of the above

Instructor Explanation:

22.

Question :

The $80,000 passive loss reduces the at-risk amount to $120,000. The passive loss is
suspended because Vic has no passive income. p.11-4 to 11-8

(TCO 2) The installment method applies to which of the following sales with payments being made in
the year following the year of sale?

Student Answer:

An automobile dealer's sale of an SUV


A cash basis individual's sale of General Electric common stock
A manufacturer's sale of fully depreciated equipment
All of the above

None of the above


Instructor
Explanation:

23.

Question :

The inventory in choice A, the publicly traded securities in choice B, and the 1245
depreciation recapture in choice C are not eligible for the installment method. p. 18-21 to 1822
(TCO 2) In 2011, Helen sold property and reported her gain by the installment method. Her basis in the
property was $150,000 ($250,000 cost less $100,000 of depreciation). Helen sold the property for
$375,000, with $75,000 due on the date of the sale and $300,000 (plus interest at the federal rate) due
in 2012. Helen's recognized installment sale gain in 2012 is:

Student
Answer:

$0.
$45,000.
$75,000.
$100,000.
None of the above

Instructor
Explanation:

24.

Question :

The total gain is $225,000 ($375,000 - $150,000). This includes $100,000 of depreciation recapture
that is not eligible for installment reporting. The remaining $125,000 gain will be spread over the
collection of the $375,000 (the contract price). In the year of sale, $75,000 is collected. Therefore, in
addition to the $100,000 of depreciation recapture, $25,000 [$125,000 x ($75,000/$375,000)]
installment sale gain must be recognized in the year of sale. The remaining gain of $100,000
($225,000 - $100,000 - $25,000) must be recognized when the $300,000 is collected in 2009:
$100,000 [$300,000 x ($125,000/$375,000)]. p.18-21 to 18-22
(TCO 2) Todd, a CPA, sold land for $200,000 plus a note for $400,000. The interest rate on the note
was equal to the federal rate. The fair market value of the note was $360,000. Todd's basis in the land
was $75,000.

Student Answer:

If Todd uses the accrual basis to report the income from his practice, then he
cannot use the installment method to report the gain on the sale of the land.
If Todd uses the cash basis to report the income from his practice, then he
cannot use the installment method to report the gain from the sale of the land.
If Todd uses the installment method to report the gain, then the contract price is
$600,000.
If Todd does not use the installment method, then his gain in the year of sale is
$125,000 ($200,000 - $75,000).
None of the above

Instructor
Explanation:

The contract price is $600,000, the $200,000 down payment plus the face amount of the
note of $400,000. The installment method can be used to report the gain on the land,
regardless of the method of accounting the taxpayer uses to report the income from his trade
or business. Thus, answers A and B are incorrect. Answer D is incorrect because the note of
$400,000 would be included in the amount realized for the cash basis sale. p.18-21 to 18-22

25.

Question :

(TCO 2) Social considerations can be used to justify:

Student Answer:

allowing a federal income tax deduction for state and local sales taxes.
allowing excess capital losses to be carried over to other years.
allowing accelerated amortization for the cost of installing pollution control
facilities.
allowing a credit for child care expenses.
None of the above

Instructor Explanation:

Equity considerations justify choices A and B, and economic considerations justify choice
C. p.1-35 to 1-36